Five More States Make Military Retirement Tax Free

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Jim Absher is a benefits columnist for Military.com.

More than 100,000 military retirees living in five states will soon be seeing more money in their pockets, thanks to new laws that were passed in 2021 making their military retirement tax free.

Related: 2022 Brings New State Veterans Benefits for Many

While residents in three of those states will have to wait until the new year to stop paying taxes on their military retirement, retirees living in Arizona and Utah will see the changes take effect immediately. Indiana, Nebraska and North Carolina will see the changes become effective with the 2022 tax year.

The new additions bring the number of states that do not tax military retirement income to 27, while nine others offer partial exemptions and six states, plus the District of Columbia, fully tax military retirement. Nine states do not impose an income tax on their citizens.

See: State Tax Information for Military Members and Retirees

In the past year, Arizona and Utah made military retirement and Survivor Benefit Plan (SBP) payments tax free, retroactive to Jan. 1, 2021. That means retirees in those states may see a large refund when they file their state taxes this year. Previously in Arizona, up to $3,500 of military retirement pay was tax free, while Utah also limited the amount that could be deducted.

Gov. Doug Ducey’s Arizona Fiscal Year 2021 Executive Budget fully exempts Arizona income tax on all retirement pay, and Utah’s Senate Bill 11 became law in March 2021, making all military retirement tax free. 

Indiana Gov. Eric Holcomb signed a state law in 2019 that gradually increased the exemption for military retirement income. That state will stop collecting taxes on military retirement and SBP payments in 2022; previously military retirees could deduct a percentage of their military retirement from their income when filing their taxes, with up to 75% of their retirement being deductible in 2021..

Approved last May, Nebraska’s legislative bill 387  increased the amount of military retirement pay that can be deducted from gross income when filing state income taxes to 100% in 2022, meaning all military retirement becomes tax free. Previously, Nebraska excluded only a portion of military retirement from income taxes. However, survivors receiving SBP payments will still have to pay taxes on their payments.

North Carolina also passed legislation joining the list of states that no longer will tax military retirees, with the new rule becoming effective Jan. 1, 2022. Previously, only certain retirees were exempt from state taxes. SBP payments also become tax free in 2022.

See: Military Retirement and State Income Tax

— Jim Absher can be reached at Jim.Absher@monster.com.

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